Recently my nephew, who is an Executive VP of a large bank and a Certified Financial Analyst, sent me an email saying: “The stock market is insane. I have to throw away my Intelligent Investor book. It is no longer a market.”
That and the recent market rebound of more than 25% prompted me to revisit my article from March, How Low Can It Go? Possibilities from Dispassionate Market Valuation Models. Below I show S&P 500 index return expectations from the Gordon Model, a discounted dividend method. The returns over the coming year under three scenarios, Plausible, Pessimistic and Optimistic are -45%, -59% and +2% respectively. The CAPE partial mean reversion model shows a drop of 16% and a loss of 49% in a 2008-09 bear market scenario. These models and the current Federal Government and Fed actions call into question the validity of long-time financial principles of equity valuation.
Perhaps billionaire hedge fund investor Ray Dalio has the explanation in his brilliant LinkedIn article series. He lays out the case for why we may be entering an epic reset to the financial and political world order. Dalio warns: “But one cannot create more wealth simply by creating more money and credit. To create more wealth, one has to be more productive.”
Read the full article at SeekingAlpha